Study Says US Companies Pay 25% Tax Rate Abroad

At a time when international tax payments by companies are in the headlines, the Tax Foundation (TF) has analyzed that, according to Internal Revenue Service (IRS) data, United States multinational corporations paid an average effective rate of 25 percent in foreign income taxes in 2009.

The TF pointed out that, while "taxes paid by US multinational firms on foreign income have been key to the ongoing debate in Congress over fundamental tax reform, … many believe that US companies pay little or nothing in taxes on their foreign earnings. Even President Obama has suggested the need for a 'minimum tax' on corporate foreign earnings to prevent tax avoidance."

"The US has a complicated 'worldwide' system of taxation that requires businesses to pay the 35 percent federal corporate tax rate on their income – the highest in the world – regardless of whether it was earned domestically or abroad," said Tax Foundation Economist Kyle Pomerleau. "When it comes to foreign profits, companies pay tax on their income not once, but twice (less a credit for the taxes they pay to other countries)."

While American firms can delay paying the additional US tax on their foreign profits as long as the earnings are reinvested in the ongoing activities of their foreign subsidiaries (and the additional US tax is only due when the profits are eventually repatriated), the TF explained that companies are still required to report to the IRS on how much they earn in each country they operate in and how much they pay those countries in taxes, as part of their annual tax returns.

The TF noted that, "while it is undoubtedly true that US multinational firms use tax planning techniques to minimize the taxes they pay on their foreign earnings," American companies paid more than USD104bn abroad on foreign taxable income of USD416bn billion; an average effective exchange rate of 25 percent, according to the most recent IRS data for 2009.

Furthermore, while the foreign taxable earnings of US companies have grown over the years between 1992 and 2009, so have their foreign taxes. Over those seventeen years, the TF calculated that taxable income grew in real terms by 214 percent and foreign taxes paid grew by 202 percent.

The TF found that the largest concentration of foreign earnings for US multinationals was in the European Union, at USD164.5bn, on which they paid nearly USD38bn in income taxes at an average effective tax rate of 24 percent. The second largest concentration of taxable earnings was in Asia at USD60.8bn billion, where US firms paid more than USD18bn at an average effective tax rate of 31 percent.

With regard to particular countries, while the TF also emphasized that the majority of countries at the top of the foreign earnings list for US companies have normal corporate tax systems, there were two so-called tax havens, Bermuda (with USD25.3bn in income) and the Cayman Islands (USD9.1bn) within that list. Even there, US multinationals paid average effective tax rate of 17.8 percent and 20.9 percent, respectively.

However, the TF did calculate that Ireland did, due to its low statutory corporate tax rate, give US companies one of the lowest average effective tax rates at 11 percent on earnings of USD14.6bn in 2009.

"People who criticize US companies for 'avoiding' taxes on their foreign earnings need to be more careful with their language and acknowledge that our worldwide tax system requires US firms to pay taxes twice on their foreign profits, before they can reinvest those profits back home," noted Pomerleau. "Any discussion about reforming the corporate tax code must keep these facts in mind."

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